Question

A 13-year coupon bond pays a 12.7% coupon. The market discount rate is 10.5%. How much should the bond sell for as it price. Is this a discount or premium bond? b) Assume now that the bond in (a) is a semi-annual coupon bond. Using all other information in (a), compute its price. c) The ordinary shares of Afram Plains Limited just paid a dividend of GH¢ 1.25. It is expected that dividends and income will grow at the same rate of 14.05% for two years and 10.3% for another two years. The growth rate will drop to a constant 7.5% after that. The company just paid a dividend of. If the cost of equity is 11.1%, compute its price. d) What is the market value of a $1,000 face-value bond of 15 years with a 12 percent coupon rate when the market's rate of return is 8 percent?

Answer 1

A 13-year coupon bond pays a 12.7% coupon. The market discount rate is 10.5%. How much should the bond sell for as it price. Is this a discount or premium bond? b) Assume now that the bond in (a) is a semi-annual coupon bond. Using all other information in (a), compute its price.
a) This is premium on discount because its interest rate  (12.7%) is higher than current rates (10.5%)  in the market.
b)
Face value	$  1,000.00
Semiannual coupon rate =12.7%/2	6.35%
Semiannual coupon Payment	$       63.50
interest rate = 10.5%/2	5.25%
Period = 13 x 2	26
Current Price	$1,154.13
The ordinary shares of Afram Plains Limited just paid a dividend of GH¢ 1.25. It is expected that dividends and income will grow at the same rate of 14.05% for two years and 10.3% for another two years. The growth rate will drop to a constant 7.5% after that. The company just paid a dividend of. If the cost of equity is 11.1%, compute its price.
c)
Year	Dividend	Discount Rate 11.1%	Present Value
1	1.43	0.9001	1.28
2	1.63	0.8102	1.32
3	1.79	0.7292	1.31
4	1.98	0.6564	1.30
4	59.07	0.6564	38.77
		Total	43.98
Stock price = $43.98
Share price at end year 4 = P4 = 1.98 x (1+7.5%)/(11.1%-7.5%)	59.07
d) What is the market value of a $1,000 face-value bond of 15 years with a 12 percent coupon rate when the market's rate of return is 8 percent?
Face value	$  1,000.00
coupon rate =	12.00%
coupon Payment	$     120.00
interest rate =	8.00%
Period =	15
Current Price	$1,342.38